Dan Ariely is a behavioral economist, which is to say he mixes human behavior, psychology and economics together to give us a deeper insight into why we do the things we do. Each week, he does a Q&A column in the Wall Street Journal but I usually catch it[3] on his blog. A little while back, Ariely fielded a great question that I think you guys would be interested in.

Dear Dan,

I don’t care about cars, never have. But I’m a sales executive, and people tell me I should own a nice car (BMW, Mercedes, etc.) to enhance my credibility to both my customers and sales team. I can afford either but would rather save the cash and buy a Honda. Does it matter?

—Cody

Dan’s answer discusses a concept known as signalling. Signalling is simple – it’s the idea that you are conveying information, hopefully positive information, to someone else indirectly, in this case using some sort of visual cue. Have you ever noticed at real estate agents drive really nice cars? Brokers typically drive really nice cars? They want to project the image of success, which is supported by the fact that they generate enough income to support the ownership of a nice car.

It’s not always about money though. How many people own a Prius because they think they’re saving the Earth by consuming less gas and how many people own it so everyone else thinks they’re saving the Earth by consuming less gas? Think about blogs – how many put badges and award banners on their sites to convey credibility? How many folks share social media stats like Facebook fans and Twitter followers? We call those signals signs of “social proof” – that is to say because other people find us credibility, Joe Internet Surfer should find us credible too (we are, I promise!).

Signalling[4] is extremely important in business because first impressions are always very important. It’s why we wear suits to interviews, even if it’s not a job where we’d wear a suit every day. In this particular case, the question of signalling collides with everything we know about personal finance. It’s not that buying a nice car is inherently bad, it’s only bad for Cody because he doesn’t care about cars. It’s like me going out and buying a ten thousand dollar watch when I don’t even wear watches! (I do on occasion but not daily)

My advice to Cody would be to buy a nice car but not one that’s overly lavish for his needs. You don’t always have to convey success through your mode of transportation but it might make sense to avoid conveying the wrong message. Cody could instead use those funds on something he cares more about such as buying a nicer suit or watch, that he’d wear every day. Maybe it’s nicer shoes that convey success but are also extremely comfortable and molded to his feet. There are plenty of ways to signal and while the car is certainly a big one, how many times do you meet someone and they never see your car?